Given the recent trends in ownership transition of construction companies from one generation of owners to the next being dominated by private equity sales and ESOPs, many companies who rely heavily on bond support are often still best served by using a much more proven and simple strategy, especially if the successor owners are family members or very close long term employees/trusted partners.
Maintaining bond credit, for many companies, is the key determinant of any future potential for success, in particular companies that began as 8(a), Service Disabled Veteran Owned businesses (SDVOB or SDV), or similar business that focuses on federal government contracting. Certainly, the same can be said for businesses that focus on local public construction of schools or local road and infrastructure contractors.
By establishing a New Company (Newco) that performs the same work (or perhaps a greater involvement in bonded work), and develops alongside the pending shut-down of the existing Old Company (Oldco), the Oldco can continue to indemnify the bonds of Newco as it begins and grows its own balance sheet and resources. Newco can use the same resources and staff as Oldco while no or reduced new work is taken on by Oldco so Oldcocan wind down over several years (to be determined by the parties). This transition can move along akin to the term of a buyout over several years by the new management team with no need for bank debt or negative hit to the balance sheet that often, and most likely occurs, when an ESOP or private equity deal is considered.
The Oldco/Newco business model is a long-proven method of handling this scenario with great success and several advantages.
When transitioning from one generation of family owners to the next in a construction company and considering the indemnity of the bond company, integrating a new company alongside the existing one can offer several advantages related to bonding and indemnity:
- Risk Mitigation: Introducing a new company can help mitigate risks associated with bonding. By having multiple companies under the same family ownership, the risk is spread across different entities. If one company faces challenges that could affect its bonding capacity, the other company might still have a strong financial standing, ensuring the family business can continue to bid on projects.
- Enhanced Bonding Capacity: The combined financial strength of the existing and new company can enhance the overall bonding capacity. Bonding companies often assess the financial stability and track record of companies before issuing bonds. Having two financially stable entities can increase the total bonding amount available to the family business, allowing them to take on larger and more lucrative projects.
- Diversification of Projects: With two companies specializing in different aspects of the construction industry, the family business can diversify the types of projects they undertake. For example, one company could focus on commercial projects while the other specializes in residential projects. This diversification can attract a broader range of clients and contracts, reducing dependence on specific market segments and increasing bonding opportunities.
- Flexibility in Bonding Requirements: Different projects may have varying bonding requirements. By having two companies, each catering to different project types, the family business can be more flexible in meeting diverse bonding criteria. This flexibility enables them to bid on a wider array of projects, increasing the chances of securing contracts.
- Professional Expertise: The new company may bring specialized expertise or certifications that are valuable in securing specific types of projects. For instance, if the new company specializes in green building technologies or has certifications related to environmentally friendly construction practices, it can open doors to projects that prioritize sustainability, which is an increasingly important factor in the construction industry.
- Confidence of Bonding Companies: Bonding companies may view the establishment of a new, well-structured company as a sign of the family’s commitment to the construction business. Demonstrating growth and expansion through a new company can instill confidence in bonding companies, making them more willing to issue bonds to both entities within the family business.
It’s crucial for the family to maintain transparent communication with the bonding company throughout this transition. Clearly outlining the relationship between the existing and new companies, along with the shared resources and support between them, can provide assurance to the bonding company, reinforcing their trust and willingness to provide necessary bonds.